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Business Commentary/Dilip Thakore

How to sustain the stockmarket boom

According to a study made by a financial newspaper, the market capitalisation (total number of listed shares multiplied by market value) of the Bombay Stock Exchange has risen from Rs 4.88 trillion in August 1998 to Rs 7.20 trillion currently (August 31, 1999).

Significantly, Rs 2.32 trillion has been added to the market capitalisation of the BSE during the past four months. That is something to write home about in these depressing times, as an unenthusiastic population gets ready to vote in a new set of clueless governments in New Delhi and several state capitals.

Indeed against the prospect of yet another constantly in-fighting coalition of political parties assuming office in Delhi in October, the confidence being reposed by foreign and domestic investors in the growth prospects of the Indian economy -- and that's what surging equity indices and zooming share prices are all about -- is astonishing.

On June 16, the BSE's index of market-leading price-sensitive scrips, the Sensex, had slipped below the 3,000 mark. On August 30, the Sensex rose to a new all-time high of 4,965.79 -- just 34 points short of the magical, never-before 5,000 high-water mark, before closing the day at 4,905.89.

Since then the bullish fever has abated somewhat and currently the Sensex is marking time at 4,750. But the general expectation is that after the new government assumes office in New Delhi in mid-October, the Sensex will surge past the psychological 5,000 barrier.

But already fears are surfacing that this extraordinary and unexpected rise in equity values will be followed by the discovery of yet another scam which will prick the stockmarket bubble.

The ghost of the 1992 Harshad Mehta scam which blew a giant size hole in the stockmarket and sent equity values into a deep depression is haunting the corridors of Jejeebhoy Towers which houses the BSE in Dalal Street, Bombay.

An unfounded rumour of a major stockmarket operator having been discovered to be rigging prices in cahoots with a mutual fund last week sent the Sensex plunging by 300 points in one day before the rumour was nailed and equity prices recovered. And even the Securities and Exchange Board of India, somewhat rattled by the sharp upsurge in equity values, felt obliged to issue a statement cautioning small investors to "check the fundamental quality of the stocks" they may purchase.

So this time around now, an overdue consensus seems emerging that the equities' rally must be sustained and that the boom-slump cycles which characterise the Indian stockmarkets, must be broken.

This requires that the several constituencies which manage and influence the behaviour of the stockmarket, need to understand the importance of their roles. They need to discharge their duties and responsibilities with due care and diligence in a spirit of enlightened self-interest. This has been conspicuously absent on the bourses in the past.

First of all, the general public and their representatives in Parliament and the state legislatures need to grasp the importance of the stockmarket for the national development effort. Unfortunately, because of the myopically speculative behaviour of the stockbroking community, the boom-slump characteristic of the bourses and poor supervision of stockmarket operations, the popular impression is that the bourses are little better than legalised gambling dens into which ordinary, law-abiding citizens venture at their peril.

This popular misconception needs to be disabused.

Stockmarkets are vital for economic development because they are capital mobilisation centres in which entrepreneurs with business promotion and development ideas can raise the money to finance their enterprises. Conversely, they are also important because they permit citizens with small savings to purchase a piece of the action in great and potentially great business enterprises. Therefore, a healthy and well-regulated stockmarket encourages savings and investment in the nation-building effort.

Consequently, if the current boom in equity values which is re-attracting small investors to the stockmarket is to be sustained, the first priority should be to improve the operational efficiency and supervisory regulation of the stock exchanges.

Unfortunately, until very recently, investing in equities was always a highly paper-intensive and time-consuming business. A large number of forms still have to be filled in and together with valuable share certificates, have to be entrusted to the vagaries of the postal service.

With the recent introduction of dematerialised or computerised trading, an overdue attempt has been made to eliminate the paperwork disincentive. But demat trading is in its infancy and one hopes that SEBI and stock exchange boards will spare no pains or expense to install tried and tested demat trading systems which are fraud-proof. The last thing that the stockmarket needs is a computer-related scam which will destroy slowly-building investor confidence.

Therefore, it is also very important that the Union finance ministry and the Company Law Board, which is run by bureaucrats who share the popular aversion and scepticism of the public towards the stockmarket, begin to take their supervisory duties seriously.

One of the major reasons why the IPO (IPO = initial public offer) market is dead as a doornail is that over 200 company promoters who collected investors' savings for grandiose projects have vanished without a trace. One often reads in the newspapers that the CLB is still trying to trace them. Most of these are simple cases fit to be tried under Section 420 of the Indian Penal Code (cheating). They are a crime against society.

Why haven't at least a few bogus promoters been prosecuted and put away?

The major reason why frauds and scamsters have been able to take millions of investors for a ride is that big names in Indian industry and banking are all too ready to serve as directors and bankers of characters with dubious antecedents and motives who set themselves up as company promoters and take their shell enterprises public.

Therefore, not only should the law be tightened to make directors and bankers who thus aid and abet fraudulent promoters liable under civil and criminal due process, but at the same time leaders and captains of industry and banking need to exercise greater caution and responsibility while lending their names to start-up enterprises.

Yet, in the final analysis, the onus is upon investors themselves to learn from the experience of previous stockmarket booms and busts to exercise caution and restraint while investing their savings in corporate paper. Investors who adhere to a few simple rules of investing such as checking out the antecedents of company promoters, discounting promises of fantastic returns on investment, studying expert opinion in the media and reading the fine print of prospectuses would not only thwart the fraudulent designs of dubious company promoters but would serve the larger purpose of keeping such characters out of the stockmarket altogether.

That the Sensex is all set to surge past the 5,000 barrier in these uncertain times is a miracle. But the greater miracle would be a responsible and concerted efforts to sustain this unprecedented boom in India's roller-coaster stock exchanges.

Dilip Thakore

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